ENERGY SECTOR VITAL TO ECONOMY, SAYS RBC

ENERGY SECTOR VITAL TO ECONOMY, SAYS RBC

Canada’s largest bank has added its voice in asserting the energy sector’s importance to the country’s economy. Finally, some might say. Royal Bank of Canada CEO Dave McKay, in a speech to the Edmonton Chamber of Commerce on Monday, made the case that development of our energy resources today underpins the path to Canada being a leader in the energy world of tomorrow.

The bank’s backing comes almost 18 months after Scotiabank chief executive Brian Porter spoke out for the energy sector during his company’s annual meeting in Ottawa.

As they say, better late than never.

While there is no question the energy sector dropped the ball on communicating with Canadians — if it ever really possessed it — it’s equally important that leaders in other sectors of the economy are audibly and visibly part of that conversation.

That’s why McKay’s speech Monday was so important.

It comes as the clock is ticking for Ottawa to make a decision on Kinder Morgan’s Trans Mountain expansion and Petronas’s Pacific Northwest liquefied natural gas project. When Canada’s largest bank stands up and speaks of the economic linkages of the oilpatch to the overall economy, an important message is sent.

As McKay said in an interview Monday, without the revenues and tax base derived from the energy sector, the federal government faces other less-palatable choices.

“If you don’t have the tax base from the strength of the industry, you are either going to have to cut back services and/or redistribute and tax at a higher rate,” he said. “We can’t afford higher taxes in this country.

“Corporate taxes are a competitive advantage. Others want to match us. There is no room for increase.”

It’s difficult to refute that logic, but changing sentiment is a much more difficult exercise.

“We have to leverage what we have to get to where we need to go,” he said.

That means using revenues generated by the development of energy resources and reinvesting in new technologies and processes.

An example of that very concept was evident Tuesday when Evok Innovations — the venture capital vehicle formed by Suncor, Cenovus and the B.C. Cleantech CEO Alliance — announced its first round of investments in companies aimed at moving the yardsticks on reducing emissions and increasing the efficiency and productivity of the energy sector.

Evok funded five companies — four from Canada and one from California — identified as being involved in the 20 “challenge areas” of the oilpatch, ranging from the treatment of oilsands process water to carbon capture and conversion.

The key ingredient to all this — as was pointed out in a recent C.D. Howe Institute paper and reiterated by McKay — is that the long-term success of a clean tech industry in Canada is to think globally about the customer base.

“We have to take our ideas globally much faster. We are just large enough that it takes us too long to think about that,” McKay said, suggesting we need to reconsider how we assess risk and become more ambitious.

As he said, Canadians aspire to work for Google and Americans aspire to build the next Google.

It’s also about an ecosystem where capital is available to companies beyond the venture stage.

“Too many companies in Stage 2 sell because they don’t have a customer to sustain their cash flow … the role the banks have to play is helping to finance Stage 2,” said McKay.

The banks can also be active in the green bond market, as RBC has. It’s acted as the lead or joint lead manager on green bond issues worth almost $6 billion for a variety of international issuers in various currencies in the past three years.

That sounds like a big number, but for the sake of context, the broader global green bond market is estimated to be worth US$118 billion. No such issues have been made to date by Alberta-based entities.

Leveraging our resources for the future includes being realistic about pipeline infrastructure versus other options, McKay said.

“If you look at the 50 per cent increase in production that is coming online, and if you didn’t have the pipeline to transport it, then you are going to have to get it to market with more rail,” he said. “And there is a carbon footprint with rail, there is an environmental concern with rail and therefore it’s not a sustainable end-to-end model.”

That means certainty for investments, especially those with a long time horizon.

Companies can’t invest with confidence if they don’t understand the rules of the game, said McKay.

“It’s hard for us to deploy our capital into our customers’ franchises with that uncertainty. Businesses need stability of their operating environments and the rules set,” he said.

That includes having a floor price on carbon — which McKay supports — and not whining about the fact Canada is responsible for only 1.6 per cent of global emissions and should therefore let someone else deal with the problem.

“We punch above our weight and we want to continue to do that. It’s about doing what’s right,” said McKay.

“We have to start with the recognition this planet is warming and there will be significant consequences of a warming planet that we don’t even understand yet. We can’t stand back and let the other guys fix it.”

Viewed together, McKay’s speech and the theme of his interview responses link back to advertisements Royal Bank aired during the recent Rio Olympics that were about Canadians and their “someday.”

McKay is talking about Canada’s “someday” and its future as a leader in clean tech and the energy space of today and tomorrow.

“Our someday includes helping manage the climate change the planet is going through and carbon emissions. And our someday includes being a clean tech leader and investing in that sector,” McKay said.

“And the path to that someday is leveraging the resources we have in the ground today … we think Canadians realize that we want our politicians to act.”

It all makes for a convincing argument. It’s too bad it took this long to surface.